Peru, Colombia banks thrive as economies boom

PolyaLesova

Banco de Credito is Peru’s largest bank, with more than 30% market share in both loans and deposits.

LIMA, Peru (MarketWatch) — In the San Isidro business district of this city, banks occupy some of the most gleaming buildings, reflecting the industry’s good fortunes spurred by Peru’s economic boom.

Peru and neighboring Colombia have seen their economies grow strongly in recent years, and the local banking industry has followed suit.

Banks in these two Latin American countries have benefited from an expanding base of potential customers as the middle class has grown and more people have been lifted out of poverty, spurring demand for consumer loans, credit cards and mortgages. At a time when U.S. banks are reeling from numerous scandals and still struggling to deliver adequate returns for their shareholders, many lenders in Peru and Colombia boast enviably robust profit growth and double-digit returns on equity.

Guillermo Arbe Carbonel, an economist at Scotiabank in Lima, said the banking industry has tracked the economy’s organic growth and benefited from the historically low level of banking penetration.

Many families and companies weren't on banks’ radar screens before and now they are, Carbonel said. “You’re also seeing it in construction. They are building shopping malls all over the country and banks will set up branches in those malls. Now, it’s useful to have a credit card.”

Mortgage loans are growing at double-digit rates, he noted, adding: “You have very strong social mobility.”

Banco de Credito, which is part of Credicorp Ltd
BAP, +0.43%
is Peru’s largest bank, with more than 30% market share in both loans and deposits. It is followed by BBVA Continental (owned by Spanish bank BBVA SA
BBVA, +0.40%
(BBVA)), Scotiabank Peru (a unit of Canada’s Bank of Nova Scotia (BNS)
BNS, +0.06%
) and Lima-based Interbank (a unit of Intergroup Financial Services Corp.).

Reflecting the industry’s strength, Banco de Credito reported a 30% rise in first-quarter earnings and a return on average equity, a measure of profitability, of 29.2%. Total loans surged 21% to $17.6 billion year-on-year, driven by retail banking, particularly mortgages and consumer loans.

While local banks are expected to see solid loan growth this year, Peru certainly faces some challenges. One of them is dollarization, or the widespread use of foreign currency, which partially stems from the country’s painful experience with hyperinflation in the 1980s.

“Our dollarization is still high,” said Juan Carlos Odar, an economist at Banco de Credito in Lima. “The central bank is very present in the foreign-exchange market. They try to avoid volatility in the exchange rate.”

Scotiabank’s Carbonel noted that the amount of loans and deposits denominated in U.S. dollars has declined in recent years, but remains significant. “With low inflation, it’s easier to transact in soles,” he said.

One U.S. dollar currently buys around 2.62 Peruvian soles.

Colombia

Across the border in Colombia, the banking sector is also thriving and has attracted interest from foreign investors. Commercial and consumer loans, which account for 90% of the total loan portfolio, are growing at double-digit rates. Mortgage lending is robust though it only accounts for around 8% of total loans. While nonperforming loans have edged higher, they remain at historically low levels, according to Interbolsa.

Banco de Bogota headquarters in Bogota, Colombia.

Colombia suffered a severe mortgage crisis in the late 1990s, when nonperforming loans soared as many people were unable to continue making their mortgage payments. As banks engaged in mortgage lending went bust, the government intervened and recapitalized financial institutions. That crisis slowed down the development of the financial sector and reduced loan growth during the following decade.

Grupo Aval, the massive conglomerate built up by billionaire Luis Carlos Sarmiento, is Colombia’s largest financial group and controls around 30% of the local banking sector. Aval owns several banks, including Banco de Bogota, the country’s second-biggest lender, and Porvenir SA, the biggest pension fund.

Bancolombia SA
CIB, +0.00%
which is listed on the New York Stock Exchange, is the nation’s biggest bank with 20% of sector assets, according to data from InterBolsa. Banco de Bogota is second with 15%, Banco Davivienda SA is third with 12%, and BBVA is fourth with 9%. BBVA is the largest international player, with most of the Colombian banking system controlled by domestic institutions.

“There are a lot of opportunities and international players are inclined to see that. Premiums are being paid to access the Colombian system,” said Felipe Toro, a financial-sector analyst at Interbolsa in Medellín, Colombia, pointing to two deals. Last October, Scotiabank said it would buy 51% of Banco Colpatria in a deal valued at $1 billion. And in May, Spain’s Banco Santander
SAN, +0.44%
(SAN) said it would sell its Colombian assets to Chile’s Corpbanca SA.

As foreign banks have sought access to the Colombian market, Colombian banks have expanded their footprint in Central America.

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